James Gallagher

why have income share agreements declined in popularity?

Published on March 14, 2020

Income Share Agreements were the idea upon which I built my career. Last year, I delved deep into the concept of ISAs, and tried to position myself as an expert in the space. I did so for many reasons, but the main one was that I had an irrational belief that ISAs were going to be the next big thing.

When people would talk with me about ISAs, I would get excited. The possibilities seemed endless. ISAs could be used to promote access to education, align incentives, and perhaps even assist in new talent investment and social capital infrastructure being built.

To me, the idea of an ISA was something I could not envision the future ignoring. Now that more people had started to discover ISAs, it was only a matter of time before the broader potential of ISAs was realized by society.

Over the last two months, I have noticed there has been a steady decline in activity around Income Share Agreements. In December, there were talks about an Experimental Sites Initiative being launched by the US Department of Education. That did not come to fruition. In the last three months of 2019, there were dozens of programs launched. In 2020, I don’t believe any colleges have announced that they are launching an ISA program.

Some people with whom I have spoken have wondered whether ISAs are on the decline. This is a reasonable assumption to have -- activity has slowed, and when growth of a new idea slows it is easy to proclaim that a decline is upcoming.

I think though that ISAs are just going through a phase, and that discussions about the decline in ISAs are greatly exaggerated.

Hype cycles

One reason I believe this is the case is that, with any new idea, there is a hype cycle. At first, an idea is seen as novel by a small group of people, then it is hyped up as more people discover and iterate on the idea. These newcomers are excited about the new idea, but they may not know why -- they are promoting the idea only because it seems interesting. These newcomers eventually move onto the next “big thing,” and stop actively contributing to the ecosystem of the idea they had previously hyped up.

ISAs have gone through a similar cycle. Initially, ISAs were a novel concept discussed in a few specific education circles. Then the idea gained wide scale recognition both in education and non-education contexts. Now, though, many of those people have lost interest in ISAs, and are moving onto the next “big thing” they see coming.

Just because the “hype group” is no longer thinking about ISAs, there is no reason to suggest the underlying concept has lost usefulness. After all, any idea -- whether it is an ISA, crypto, or anything else -- will still have the same utility even if few people recognize it, or even if people stop thinking about it. Fewer people are talking about ISAs, but the idea still has potential to democratize access to education and promote diversity.

Regulation

I was talking with a friend yesterday about ISAs. When I was asked to discuss the single biggest barrier that has stifled the growth of ISAs, one word came to mind: regulation.

In 2019, almost every discussion I had about ISAs inevitably lead to regulation. People wanted to know what I knew about upcoming legislation. Were there any new legislators discussing ISAs? Was the ISA Student Success Act going to be passed by Congress? I believe this was the case because ISAs operate somewhat in the financial services industry, and any financial concept seems to come bagged with a large amount of red tape.

Regulation was -- and still is -- important for a few reasons. First, regulation gives companies operating ISA programs a clear indication of what to expect in the future. Second, regulation gives consumers more confidence in the terms to which they are agreeing, knowing that there are clear laws guiding the administration of an ISA.

Because there have been very few regulatory actions taken to promote the development of ISAs (at least to the extent of my knowledge), ISAs have grown at a slower rate than many people expected. In addition, the fact that we have moved to the next stage of the hype cycle -- where only the people who believed in the idea from the start and a couple of newcomers are working on the idea -- has resulted in fewer people actively pushing for legislation.

Underwriting risk

ISAs have also grown at a slower rate because there is a lack of infrastructure supporting their maintenance and administration.

There are a few big players -- like Vemo Education and Leif -- which offer compliance and admin services, but those companies cater to only a select type of company. For instance, Vemo is focused on skills training programs and college programs, which means that companies like talent accelerators which may also be interested in ISAs have been unable to find the infrastructure they need. These big players also charge high rates for their services.

At present, if you are not a school or a training program, offering an ISA program can usually only be done in-house. This involves hiring an attorney to help you write an ISA, seeking advice from other people in the space, and perhaps even hiring investor relations staff to help you finance and underwrite your ISAs. For most companies, these are complexities you don’t want to worry about, especially if you are at an early stage.

The lack of stable infrastructure in place to support ISAs -- such as compliance monitoring, legal support, and other technical solutions -- has meant that new companies interested in ISAs have been unable to seek the support they need to implement a new program.

In addition, it has been difficult for companies offering ISAs to underwrite the risk associated with their contracts. New companies want to be able to answer questions like: what is the risk attached to offering an ISA? How should I account for those risks? What parameters do I need to take into account when calculating risk? Yet, to this day, there is very little information publicly available about underwriting risk. I believe this at least partly explains why an even smaller number companies are looking into ISAs: it’s just too difficult to understand what the costs and benefits are associated with ISAs, from a business and economic perspective.

ISAs are not declining; they are entering a new period of growth

There are no shortage of reasons why ISAs have not been discussed as much as they were in 2019. I could argue that access to capital markets is another inhibiting factor responsible for slower growth in ISAs. Or I could argue that the bad publicity bootcamps offering ISAs like Holberton School and Lambda School have received has soured a few people on the idea of taking out an ISA.

But I am not going to argue those reasons to a great extent, because I think doing so would cause us to lose sight of an important fact: ISAs are entering a new period of growth.

In 2019, ISAs became a hyped-up topic -- people talked about how they could be used to solve a wide range of problems, and there was a lot of excitement about their future. However, now people are taking a more realistic view of the benefits of an ISA. ISAs can:

Help promote access to services with a high financial barrier for entry;

Provide alternative financing options for high-cost services;

Align incentives between a service provider and a customer.

These are the same benefits which ISAs delivered a year ago, or two years ago. The only difference is that people are thinking about ISAs from a more realistic perspective.

I think ISAs have the potential to do a lot of good, and I think that over the next few years we will see a number of other schools starting to offer ISAs. In fact, I think we will even see ISAs be explored outside of education more in the future -- the context of talent investing appears particularly interesting to me. However, this growth will be slow, and will be in response to factors like growing student demand instead of general hype.

Are ISAs dead? Absolutely not. Are ISAs declining? I don’t believe so. Most companies that offered ISAs in 2019 are still doing so in 2020, and indeed companies like Kenzie Academy and Lambda School have raised massive investment vehicles to finance their growth.

ISAs are just growing at a more reasonable rate -- one that is in response to demand for the vehicle. If more regulation enters the space, perhaps more students will demand ISAs; if student debt continues to be a national issue, college students may explicitly demand ISAs.

Right now, though, the people focused on promoting ISAs are mainly those who have taken a long-term view of the security. The people who hyped up ISAs in 2019 have largely moved onto chasing the next big things they think will change the world.

ISAs have so much potential, it’s just that potential may not be, at least right now, as much as some people predicted last year.